Gold funds' rally can be expected to continue for some more time as global and domestic volatility have added to the safe-haven appeal of the yellow metal, reports Jash Kriplani.
Gold funds have been the best-performing category in the last few months, beating all other fund categories by a wide margin.
According to data from Value Research, gold funds gave returns of 18.6 per cent in the three-month period, which was significantly higher than nine per cent returns given by the long duration schemes; the second-best category in the same period.
"The rally in gold prices has helped investors with exposures to gold funds mitigate the hit on their equity or debt investments seen in recent months," said Vidya Bala, head of mutual fund research at FundsIndia.
In one-month period, gold funds have delivered returns of close to ten per cent.
In longer time-frame of one-year, gold funds have given returns of 26 per cent.
In the same period, long duration schemes have given returns of 19 per cent.
On the other hand, equity categories such as large-cap funds have given negative returns of one per cent in the three-month period.
Mid- and small-cap funds have given negative returns of three per cent and six per cent, respectively.
Over one-year period, mid- and small-cap funds have seen negative returns of 11 per cent and 16 per cent, respectively.
However, advisors feel that investors should use gold funds for asset-diversification and avoid bumping-up their exposures on back of the price run.
"We have seen gold funds deliver double-digit returns in the past too, but for short periods post-global crisis.
"Gold rallies don't tend to be sustainable for longer periods of time.
"So, gold can be used by an investor for asset-diversification and not as a primary investment category," Bala said.
"Investors should build their positions in a staggered manner.
"Gold prices are driven by several variables, so investors should not build their position just on the basis of recent price action.
"Typically, an investor should have five-ten per cent of his portfolio exposed to gold to hedge against inflation," said Amol Joshi, founder of Plan Rupee Investment Services.
Gold funds' rally can be expected to continue for some more time as global and domestic volatility have added to the safe-haven appeal of the yellow metal.
Continued trade tensions between the US and China, combined with risks of a currency war, have led to global headwinds.
Back home, sell-off by foreign institutional investors due to tax surcharge, uncertainty over Kashmir and cut in growth forecast, have contributed to market volatility.
According to experts, investors can also look at sovereign gold bonds as an alternative to gold funds.
"Sovereign gold bonds offer fixed interest rate in addition to capital appreciation.
"Also, if these bonds are held to maturity, these are more tax-efficient products," Bala added.
However, investors will have to wait for making investments in sovereign gold bonds, as these are offered by the government at different points in time.